S. 138: A Dilemma by Somesh Vaidya @LexCliq

COVID-19 has thrown a shadow on commercial economic activity, causing abrupt disruptions in the continuity of production, supply networks, and commerce. The epidemic has compelled the Indian government to devise appropriate strategies and plans to restore and improve the country’s otherwise lethargic economy. To guarantee that global investors continue to select India as a suitable location for their investment operations, the goals of increasing the ease of doing business and encouraging Foreign Direct Investment have become critical.

The government is addressing the difficulties presented by issuing notifications, circulars, and amendments with the goal of restoring stability in the business climate. On June 8, 2020, the Finance Ministry took one such move directly aimed at boosting business mood as well as unclogging court procedures by decriminalising minor offences such as ‘cheque dishonour.’

NOTIFICATION OBJECTIVE DATE: JUNE 8, 2020

The decision to decriminalise the offence of ‘Dishonour of Cheque’ under Section 138, Negotiable Instruments Act, 1881  [hereafter, S. 138, NI Act 1881], amongst other offences, was made with many considerations stated in the notification in mind. These considerations underpin the decision to decriminalise thirty-nine Sections under nineteen laws. These are the following:

(i) Reduce the burden on businesses and instil confidence in investors;

(ii) Maintain a focus on economic growth, public interest, and national security; and

(iii) Because mens rea (malafide/criminal intent) plays an important role in the imposition of criminal liability, it is critical to evaluate the nature of noncompliance, i.e. fraud as opposed to negligence or inadvertent omissions).

(iv) The habitual nature of non-compliance

SECTION 138, OBJECTIVE OF NEGOTIABLE INSTRUMENTS ACT, 1881

The offence under S. 138 was added to the Act by the Banking, Public Financial Institutions, and Negotiable Instruments Laws (Amendment) Act, 1988, and was later supplemented and amended by the Negotiable Instruments (Amendment & Miscellaneous Provisions) Act, 2002 [hereinafter, Amendment Act, 2002]. The goals of adding Section 138 to the law were twofold: first, to improve the acceptance of checks in payment of obligations,  and second, to improve the instrument’s reliability. A check was issued simply as a mechanism to not only delay but also cheat creditors in a significant number of business transactions throughout India, undermining the integrity and trust of its issuance in commercial transactions.

THE IMPACT OF CRIMINALIZATION

After more than thirty years of criminalising cheque dishonour, it has evolved as not only an accepted, but even a preferred form of economic transaction. S. 138 accomplished its goal in this regard. With a rise in intra-state and inter-state economic activity, the check began to be recognised as a viable and effective form of transaction. To some degree, confidence in criminal courts for recovery in instances of dishonour played a part, but the broader acceptance of cheques may be ascribed mostly to the trust reposed by business organisations on one another in the post-globalization period.

The legitimacy of a cheque, on the other hand, remains in jeopardy, since S. 138 cases continue to account for at least one-fifth of all criminal cases pending in district courts throughout India. In this context, where the credibility of the cheque has dwindled over the last decade and criminalization of the offence has not yielded satisfactory results, decriminalising poses as both an effective and ineffective solution due to the unproven myth of criminalization having a more coercive effect.

Following the criminalization of the crime in 1988, it was complemented by a slew of additional provisions aimed at instilling fear in the public by imposing harsh penalties in the event of conviction under the provision. However, the ineffectiveness of these laws in operation, as well as the low conviction rate, along with the rigours and loopholes of court proceedings, has reduced the coercive power of criminalising cheque bounce.

The failure to ensure the presence of the accused in court, despite the issuance of bailable/ non-bailable warrants according to the process u/s 72 of the Criminal Procedure Code, 1973 [hereinafter, CrPC], is one of the primary challenges affecting the disposition of these cases and, as a result, the credibility of the instrument, as noted in Makwani Mangaldas Tulsidas v. the State of Gujarat. Despite the criminal penalties, a complaint filed under S. 138 is of a private character. As a result, as has been noted, the police pay less attention to private complaints, and the courts, perplexed by this fact, have failed to take action against the irresponsible police personnel.

Another difficulty is that Section 143 of the Act requires an offence under Section 138 to be tried summarily within six months. However, due to procedural incumbencies and the rigours of court in terms of collecting evidence, this provision has failed to be of any practical importance, since disputes may last up to fifteen years. The bench in Makwani, further noted that courts have seldom employed coercive measures as required under sections 82 and 83 of the CrPC, to guarantee the attendance of the accused, allowing disputes to linger for years. As a result, decriminalising cheque bounce seems to be a feasible alternative.

EFFECT OF DECRIMINALIZATION

S. 138, while established as a strict liability crime, has many protections in place, in the shape of legislative measures, to protect the interests of bona genuine instances.

The criminal responsibility of imprisonment depicted in this section is applied solely in the event of check dishonour and subsequent refusal to repay even after the statutory notification time has expired. It is not a sentence of jail imposed on a person for simply failing to pay a civil obligation. Thus, even without decriminalisation of the cheque bounce, the concept envisioned in the notice related to ‘mens rea’ is fulfilled.

With the exception of the ‘mens rea’ argument, all other criteria seem to be better maintained with the decriminalisation of the crime. The criminalization of the offence has become obsolete as the deterrence impact of decade-long trials has waned. Decriminalization, on the surface, seems to boost investor confidence by removing the threat of repercussions if a check is repeatedly delayed or dishonoured.

However, in the event that the crime is decriminalised, the alternative process in place makes it more onerous and, as a result, discourages investors from investing in India. With the threat of being prosecuted as an “accused” removed, the credibility of the cheque would deteriorate further since procedures such as the issue of non-bailable warrants and attachment of property are not available in a civil trial for collection of dues. Furthermore, the debtor may be penalised even if a remedy is sought under other sections of the Indian Penal Code, 1860, such as S. 406 (Criminal Breach of Trust) and S. 420 (Cheating). However, money recovery continues to be a challenge.

Furthermore, even if a judgement has been issued in favour of the complaint, enforcing the order remains a challenge. The drawer may be arrested and detained in order for the decision to be carried out. The provisions themselves, however, have certain restrictions. If the drawer is a woman, she cannot be arrested or imprisoned, nor can her property be attached for recovery reasons. Furthermore, the detention may only be for a maximum of three months at the complainant’s expense.  As a result, the recovery process in the event of check dishonour makes it difficult for investors to continue doing business in India.

Finally, by virtue of S. 147, S. 138 is already a compoundable offence at any level.
Despite the fact that the provision has been in effect for almost two decades, expediting the disposition of cases remains a problem. Given this context, the Finance Ministry’s notice to categorise the offence as compoundable is ineffective.

SUGGESTIONS AND CONCLUSION

As a result, after a thorough analysis of either scenario, it is apparent that the goals of unclogging Indian courts and increasing investor trust can only be met if a new effective system is put in place. Such a commercially feasible solution can only be found by using sophisticated technology in this area and utilising the availability of rapid payment options other than cash (UPI, NEFT, RTGS, IMPS). Post-dated checks, on the other hand, remain popular because they are still economically feasible for conducting future-settled transactions. As a result, the need for a suitable solution is not unjustified.

Assuming that the government does legalise S. 138, creditors will have to seek restitution via civil courts. In such a case, the government should consider enacting new laws to place additional protections and procedures in the hands of complainants in order to ensure the collection of dues as soon as possible. Introducing measures to attach debtors’ property in the event of a cheque bouncing, as well as the availability of similar compensation provisions under the Civil Procedure Code along the lines of Sections 143A and 148 of the Negotiable Instruments Act of 1881, are some measures that can be implemented to provide a better recovery mechanism.

Written by Somesh Vaidya

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